Outlook for sukuk remains healthy

Standard & Poor’s Rating Services (S&P) credit analyst Mohamed Damak said in a recent report that “the outlook for asset-backed sukuk is positive despite the doubts raised by the disruption in global financial markets and in structured finance.”

However, he said the knock-on effects of the economic slowdown was pressuring Islamic financial institutions and “creating new obstacles for their development”.

AmResearch Sdn Bhd credit research director Fu Yew Sun said for Malaysia, where most bonds issued by the Government and the private sector were sukuk, the concerns in the short-term were over credit quality.

He added that the issuance of government-guaranteed bonds to finance pump-priming measures had also put pressure on private debt securities (PDS) or sukuk issued by companies.

“Investors are still concerned about credit quality and hence they’re unwilling to invest in anything with less than AAA-rating,” Fu told StarBiz, adding that the Government’s issuance of more Malaysian Government Securities and other government-guaranteed bonds had absorbed most investors’ funds.

“The preference for government-guaranteed bonds has pushed demand to the higher end of the market,” he said.

Fu said for this year, if government-guaranteed bonds from Cagamas Bhd, financial guarantee institution Danajamin Nasional Bhd, Khazanah Nasional Bhd and the newly set-up state investment fund Terengganu Investment Authority were included, there would be easily RM40bil to RM45bil in bonds to be issued (note: the figures here include PDS issuance).

“Rating Agency Malaysia and Malaysia Rating Corp Bhd (MARC) estimate that around RM30bil to RM35bil in PDS will be issued this year,” he said.

Fu said for the sukuk market to improve next year, sentiment on credit had first to improve on the back of a sustained recovery in the economy, which could happen towards the end of 2009 or early 2010.

Meanwhile, MARC fixed income research head Wan Murezani Wan Mohamad said as the credit crunch spilled into the real economy, issuers were likely to put their expansion plans on hold.

He said the “fragile” confidence among investors was also reflected in the elevated corporate spreads prevailing. “In a globalised world, any instrument, conventional or Islamic, will be affected,” Wan Murezani said.

According to the S&P report, total global sukuk issuance was halved to US$14.9bil last year compared with US$34bil in 2007.